GS vs UBS on Bond Market...who is correct?

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Frank2012
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GS vs UBS on Bond Market...who is correct?

Post by Frank2012 »

Fellow Bogleheads,

Bond bust or not? Check out this article....http://www.cnbc.com/id/100780264

If Goldman Sachs and UBS can't figure out the bond market with all their power, influence and brilliance, then I'm not going to worry about it and will keep the faith with a simple three-fund portfolio. My bond fund may go up, or it may go down, but at least I KNOW I don't know the future...so I am staying the course.
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nisiprius
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Re: GS vs UBS on Bond Market...who is correct?

Post by nisiprius »

The other thing. Forget all the "who's right" and "we love a faceoff." I don't know who's right, and I don't care. And put aside tfb and Kevin M's argument, which could well be right, which is something like "why take any risk in bond funds at all, when bank CDs are just as good?" For whatever reason, inertia or laziness or indecision or pigheaded stubbornness, I intend to stay the course in Total Bond.

Let's say Goldman Sachs is right. How badly do I get hurt?


Goldman Sachs says the 10-year Treasury, currently at 2.13%, will rise to 2.5% by the end of the year.
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In other words, they are talking about a rise of less than 1%. Hard to know what point to start measuring from.

Now, some may recall that back in August of 2010, Jeremy Schwartz and Jeremy Siegel said that
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more…. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds…. The possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield.
And what happened? Well, the interest rate rise they warned about really happened, see below.

What Goldman Sachs is talking about is worse than what really happened between August 2010 and February, 2011.

So did you notice anything terrible in your Total Bond in early 2011? Yes, there was a dip--look it up for yourself--but did you notice it at the time? In February 2011 in this forum did you notice dozens of panicky threads in the forum by Total Bond investors seeing their retirement go up in smoke? Nope, neither did I.

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Kevin M
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Re: GS vs UBS on Bond Market...who is correct?

Post by Kevin M »

I just happen to be watching a debate between UBS and GS guys now. UBS timeframe is about 6 months; i.e., they think 10-year rates are likely to drop back down to about 1.7%, giving you a nice short-term profit; it's a trade, not an investment. The GS timeframe is longer.

I'm not a trader, and I don't see why I should take the huge interest-rate risk to get 2% in a 10-year Treasury when I can earn 2% in a 5-year CD with an early withdrawal penalty of 180 days of interest, capping my downside at a 1% loss. CDs are not just as good as bonds, they are better if viewed from an appropriate risk/return perspective, unless liquidity is a major concern. Even then, retail investors can earn 1% in an online savings account, which is about what a 5-year Treasury is yielding, so again, why take the interest-rate risk if you don't need to, with the upside very limited, and the downside very large?

If you want to take credit risk to get a higher yield, that's a different story. You are taking credit risk in TBM, but you're not getting much of a premium for it relative to a 5-year CD earning 2%. You can get a higher yield with less risk by replacing the Treasuries, Agencies, and MBS in TBM with CDs (higher yield, similar credit risk, much less interest-rate risk), and use an intermediate-term investment-grade, corporate or muni bond fund for the rest.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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